Wednesday, March 8, 2017

Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC

Massachusetts Court Substantively Consolidates Corporation and Commonly Owned LLC

      In a decision rendered last December, a Bankruptcy Court sitting in Massachusetts found, on the facts, that it could “substantively consolidate” the assets of the corporation, the debtor in bankruptcy, and a commonly owned LLC. In re Cameron Construction & Roofing Co., Inc. (Lassman v. Cameron Construction LLC), Case No. 14-13723-JNF, Adv. P. No. 15-1121, 2016 WL 7241337 (D. Mass. Dec. 14, 2016).
      Cameron Construction & Roofing Co. was, for all intents and purposes, in common ownership with Cameron Construction, LLC. When the corporation went into bankruptcy, the Trustee (Lassman) sought to bring into the bankruptcy Cameron Construction LLC and its assets.
      Cameron Construction LLC was the owner of the property out of which Cameron Construction & Roofing operated. Its articles of organization identified the purpose of the company as owning and managing real estate. It, however, went well beyond that, and had employees who were utilized in the corporation's construction and roofing activities. There was not, however, an employee leasing agreement with respect to those activities, and neither was there a signed lease for the use of the real property. Based on these and other activities indicating that the two ventures were not operated on arm’s-length terms, Lassman sought substantive consolidation.
      In response, it was argued that each company was duly organized, that the proper annual reports had been filed with the Massachusetts Secretary of State, and that each company filed its own income tax returns.
      The court would find that those distinctions were insufficient to preclude substantive consolidation. 2016 WL 7241337, *7. Specifically:
The Trustee demonstrated that there is a “substantial identity between the entities to be consolidated.” The common ownership and control of the Debtor and the Defendant by Cameron are admitted facts. The Debtor initially contributed $12,000 of capital for a 1% interest in the Defendant, whereas Cameron's contribution of $108,000 for a 99% interest in the Defendant was disproportionate. The capital structure was unfair to the Debtor, which should have been entitled to a greater percentage of ownership in the Defendant given its 10% capital contribution.
The Defendant did not engage in business in accordance with its business purpose as set forth in its Operating Agreement and Annual Report. It’s business went beyond the ownership, management and development of real estate. The Defendant’s seventeen employees worked exclusively for the Debtor in performing services in the Debtor’s business during 2011, 2012 and 2013. Thus, the work of the Defendant’s employees was outside the scope of the stated business purpose of the Defendant’s business as a real estate holding company. There was no formal sharing arrangement for the services provided by the Defendant’s employees to the Debtor.
The Debtor and the Defendant also did not have a written lease for the premises occupied by the Debtor. Funds were paid by the Debtor to the Defendant in denominated rent, but those amounts varied from year to year. The funds paid as “rent” were booked as payment of the work performed by the Defendant’s employees.
       While the court had been careful, earlier in the opinion, to distinguish substantive consolidation from piercing the veil, it also applied certain of the piercing factors as further evidence that substantive consolidation in this instance was appropriate.


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